"MF Global and the great Wall St re-hypothecation scandal"

MateAmargo

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En las heladas aguas del cálculo egoista.
Te quoteo del hilo del Ibex esto:
No, pero en serio. A veces podemos pensar que los pufos solo son en instrumentos financieros. Pero es que yo, sin entrar en muchos detalles, he visto llegar a sucursales medianas a extranjeros, con papelitos de un banco canadiense en los que decía que el menda había depositado allí efectos (escrituras de propiedad de bienes inmuebles en Portugal) por valor de un gritón de euros, y la sucursal de aquí, a cambio de su correspondiente fee, acreditaba que el caballero era propietario de un papel que decía que había dejado un papel en un banquito en el que decía que era propietario de un fincón en Portugal. Y, al final de la cadena, eso se usaba como prueba del poderío patrimonial del menda.

O garantías bancarias por importes millonarios emitidas por Banco Famoso SCoop. (en vez de SA), con domicilio en (bendito GoogleMaps) un tugurio andrajoso de un callejón infecto, sí, efectivamente, en UK.

La cantidad de hez que circula por el sistema bancario es acongojante. Y basta tener un contacto lejano y esporádico con el sistema para darse cuenta.
Muy interesante. Si tenés mas data, creo que este sería el lugar para ampliar.
 
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melchor rodriguez

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MF GLOBAL es un banco de inversión. Quebró y punto.

El problema además del patrón dólar fuduciario (que crea deuda más allá que el sistema productivo pueda asumir) es que los bancos de depósitos y préstamos acaban metidos o acaban afectados por operaciones de alto riesgo con los bancos de inversión (muchas veces ni eso) y el Estado ha garantizado hasta un límite los depósitos de aquellos bancos. Pero al final el Estado acaba rescatando en masa al sector y no deja caer muchos bancos (algunos "caen" ya que el Estado no puede cubrir a todos) ya que teme el efecto pánico. Si dejas quebrar un gran banco de depósitos, los depositantes empiezan a retirar en masa sus depósitos de todos los bancos y llegamos a un colapso del sistema por falta de confianza. Además ayuda a este colapso no permitir otros tipos oficiales de sistemas de cobros y pagos.

Aunque en España no hemos necesitado operaciones de alto riesgo de banco de inversión. La banca española de depósitos y préstamos se ha metido en operaciones de alto riesgo en el ladrillo nacional por la complicidad pasiva de BdE. Tenemos el caso de la CAM. Como me dijo un director de una sucursal bancaria. Debía ser liquidada ya que la operación de rescate a costa de la banca a través de aumentar el % de aportaciones al FGD va salir más cara.

¿Por qué los directivos de bancos de inversión saben que sus operaciones pueden acabar en quiebra y los directivos de bancos de depósitos y de préstamos pueden acaban siendo nacionalizados y aún así realizan una y otra vez operaciones de alto riesgo -muchas veces fuera de la legalidad-?.

Pasaba lo mismo que en el modelo de patrón oro en los años de apogeo del Free Banking. La avaricia. Más riesgo, más beneficio. La diferencia es que ahora no hay ningún canje de deuda por algo tangible y hay mucho de ficción contable. Lo saben. Muchos están quebrados. Pero siempre esperan el rescate del Estado que por intereses propios de los políticos han permitido ciertas regulaciones o ser laxos en la vigilancia con la complicidad de los banqueros afines y pueden hinchar la bola de la deuda a cotas que hace colapsar la economía real. Mientras con el Free Banking y el patrón oro, no se dejaba recorrer mucho el camino y los ajustes eran muy rápidos e intensos como que el Estado no iba al rescate en masa (los bancos centrales como tales no existían con el poder de ahora).
 
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The Hellion

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Te quoteo del hilo del Ibex esto:


Muy interesante. Si tenés mas data, creo que este sería el lugar para ampliar.
No tengo mucho más que comentar sobre casos específicos de ese estilo.

Simplemente, que la banca, por influencia anglosajona, ha ido asumiendo funciones de fedatario público que en países de derecho civil tradicionalmente desempeñaban notarios y registradores, y que eso ha dado lugar a que circulen por el mundo certificados bancarios expedidos (sin necesidad de que medie mala fe, porque los casos fraudulentos son otra cosa) por personas que aceptan sin más (porque no tienen ni los medios ni la formación para comprobar la autenticidad de los documentos) los documentos que se les presentan.

Si esos documentos bancarios "privados" circulan lo suficiente y con suficiente rapidez por varios países, al final lo que queda es una referencia a una cifra que está supuestamente depositada no se sabe dónde. En teoría, se podría remontar la cadena para averiguar en qué consiste el patrimonio original, pero en la práctica no se hace.

Al igual que pasaba con las hipotecas basura titulizadas o con los fondos de los clientes utilizados varias veces como garantía en el caso de MF Global, algo que podía no existir, o que podía estar ya utilizado como garantía en otra operación, acababa en la otra esquina del mundo sirviendo para garantizar una tercera o cuarta transacción, o para acreditar la presunta solvencia de alguien.

Y al final acabamos con dinero fiat, certificados fiat y con un sector financiero que es todo humo y espejos, y que se mantiene en pie por un mero ejercicio de fe. Cuando esa fe desaparezca, y se pidan realidades tangibles, el tenderete se vendrá abajo.
 

Mitsou

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Sí, sí, que son unos hijos de la grandísima ***** pero entonces ¿qué son los políticos que pudiendo evitarlo y que supuestamente están ahí para velar por el estado, lo permiten?
 

Aferro

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¿Echará ahora la culpa Obama a Europa de toda la hez que hay? Serán cínicos los HDP.

Salut
 

El Tuerto

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Sí, sí, que son unos hijos de la grandísima ***** pero entonces ¿qué son los políticos que pudiendo evitarlo y que supuestamente están ahí para velar por el estado, lo permiten?
Se les ha ido de las manos completamente. Los políticos están para garantizar que el sistema no se hunda, el sistema que les paga tan bien por hacer tan poco.

Volviendo a la noticia, pedazo de casus belli, ¿o pagarán estos HDLP el diferencial a los PIGS en forma de cursos de inglés online?
 

Amaya

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MF GLOBAL es un banco de inversión. Quebró y punto.

El problema además del patrón dólar fuduciario (que crea deuda más allá que el sistema productivo pueda asumir) es que los bancos de depósitos y préstamos acaban metidos o acaban afectados por operaciones de alto riesgo con los bancos de inversión (muchas veces ni eso) y el Estado ha garantizado hasta un límite los depósitos de aquellos bancos. Pero al final el Estado acaba rescatando en masa al sector y no deja caer muchos bancos (algunos "caen" ya que el Estado no puede cubrir a todos) ya que teme el efecto pánico. Si dejas quebrar un gran banco de depósitos, los depositantes empiezan a retirar en masa sus depósitos de todos los bancos y llegamos a un colapso del sistema por falta de confianza. Además ayuda a este colapso no permitir otros tipos oficiales de sistemas de cobros y pagos.

Aunque en España no hemos necesitado operaciones de alto riesgo de banco de inversión. La banca española de depósitos y préstamos se ha metido en operaciones de alto riesgo en el ladrillo nacional por la complicidad pasiva de BdE. Tenemos el caso de la CAM. Como me dijo un director de una sucursal bancaria. Debía ser liquidada ya que la operación de rescate a costa de la banca a través de aumentar el % de aportaciones al FGD va salir más cara.

¿Por qué los directivos de bancos de inversión saben que sus operaciones pueden acabar en quiebra y los directivos de bancos de depósitos y de préstamos pueden acaban siendo nacionalizados y aún así realizan una y otra vez operaciones de alto riesgo -muchas veces fuera de la legalidad-?.

Pasaba lo mismo que en el modelo de patrón oro en los años de apogeo del Free Banking. La avaricia. Más riesgo, más beneficio. La diferencia es que ahora no hay ningún canje de deuda por algo tangible y hay mucho de ficción contable. Lo saben. Muchos están quebrados. Pero siempre esperan el rescate del Estado que por intereses propios de los políticos han permitido ciertas regulaciones o ser laxos en la vigilancia con la complicidad de los banqueros afines y pueden hinchar la bola de la deuda a cotas que hace colapsar la economía real. Mientras con el Free Banking y el patrón oro, no se dejaba recorrer mucho el camino y los ajustes eran muy rápidos e intensos como que el Estado no iba al rescate en masa (los bancos centrales como tales no existían con el poder de ahora).
Muy buen mensaje el suyo

Quien haya redactado la noticia original (o la fuente) manipula. Esta firma norteamericana está donde se merece, ante los tribunales penales en USA. Como otros tantos que deberían estar en la guandoca. No era una "confabulación contra los PIIGS" sino especulación fraudulenta para sus clientes inversores.

Caso 'MF Global': Corzine omiti alertas internas sobre el riesgo de los bonos europeos,Inversin - Bolsas - Mercados. Expansin.com

Estas situaciones ya se dan mucho menos pero similares sucedieron en toda europa y no en "un lugar"

El fraude de los bancos italianos - Economias

"JP, UBS, Deutsche Bank y el banco alemán Depfa fueron acusados de haber cometido fraude en la venta de derivados financieros al gobierno de Milán, en una serie de operaciones que involucran a otras trece personas."

Han sido años de verdadera guano en todos los paises. Afortunadamente dudo que regresen
 

Aferro

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Mas en unos (los de siempre) que en otros ¿ no te parece?

Salut
 

Discordante

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Yo incluso con la version para vagos y las explicaciones para cortos no acabo de entender la magnitud de estas operaciones.

¿Como re-hipotecaban esos fondos 2,3,4 o las veces que fueran? ¿Se los re-hipotecaban a si mismos y lo escribian en los asientos o como funcionaria eso?

¿Esas re-hipotecas se convertian magicamente en dinero liquido, o pasarian a ser algun tipo de garantia, aval, colateral o lo que sea? ¿Y como se utiliza esa nueva cosa X en el mercado?

Y sobre todo no entiendo como es que no hay ahora mismo dada un orden internacional de auditorias a toda entidad bancaria para saber cuantos han sido los "listos".
 

pepinox

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Yo incluso con la version para vagos y las explicaciones para cortos no acabo de entender la magnitud de estas operaciones.

¿Como re-hipotecaban esos fondos 2,3,4 o las veces que fueran? ¿Se los re-hipotecaban a si mismos y lo escribian en los asientos o como funcionaria eso?

¿Esas re-hipotecas se convertian magicamente en dinero liquido, o pasarian a ser algun tipo de garantia, aval, colateral o lo que sea? ¿Y como se utiliza esa nueva cosa X en el mercado?

Y sobre todo no entiendo como es que no hay ahora mismo dada un orden internacional de auditorias a toda entidad bancaria para saber cuantos han sido los "listos".
Repurchase agreement - Wikipedia, the free encyclopedia

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest.

A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan while one of the settlement date of the forward contract is the maturity date of the loan.

Repurchase Agreement (Repo) Definition | Investopedia

Definition of 'Repurchase Agreement (Repo)'
A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the amowing day.

For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.

Rehypothecation financial definition of Rehypothecation. Rehypothecation finance term by the Free Online Dictionary.

Rehypothecation
Pledging to banks by securities brokers of the amount in customers' margin account as collateral for broker loans, which are used to cover margin loans to customers for margin purchases and selling short.

------------------------------------------------

Rehypothecate
To pledge securities as collateral for a loan when the same securities have already been pledged for another loan. Generally speaking, a brokerage rehypothecates when it needs to secure a loan for a client. That is, the client pledges securities for a loan on a margin account and the brokerage uses those same securities to procure a loan from a bank to finance the loan for the client.

Hypothecation - Wikipedia, the free encyclopedia

Rehypothecation

Goldman Sachs Tower – banks that provide Prime brokerage services are able to expand their trading operations by re-using collateral belonging to their counter-parties.Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings.

In the UK, there is no limit on the amount of a clients assets that can be rehypothecated,[3] except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance.[4][5][6]

In 2007, rehypothecation accounted for half the activity in the Shadow banking system. Because the collateral is not cash it does not show up on conventional balance sheet accounting. Prior to the Lehman collapse, the International Monetary Fund (IMF) calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statutory limits governing the reuse of a client's collateral. It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated several times over, with an estimated churn factor of 4.[5]

amowing the Lehman collapse, large hedge funds in particular became more wary of allowing their collateral to be rehypothecated, and even in the UK they would insist on contracts that limit the amount of their assets that can be reposted, or even prohibit rehypothecation completely. In 2009 the IMF estimated that the funds available to US banks due to rehypothecation had declined by more than half to $2.1 trillion - due to both less original collateral being available for rehypothecation in the first place and a lower churn factor.[5][6]

The possible role of rehypothecation in the Financial crisis of 2007–2010 and in the shadow banking system was largely overlooked by the mainstream financial press, until Dr. Gillian Tett of the Financial Times drew attention in August 2010 [6] to a paper from Manmohan Singh and James Aitken of the International Monetary Fund which examined the issue.[5]

Rehypothecation | RepoWatch
 

Playero

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A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest.


Si es que hasta el nombre lo dice: Repo
En español se traduce como Repu la lechona
Cruz y Raya - Repu la lechona - YouTube
 

pepinox

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Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else

In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical amow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things, and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.

But first, a detour to London...

As readers will recall, the actual office that blew up the world the first time around, was not even based in the US. It was a small office located on the top floor of 1 Curzon Street in London's Mayfair district, run by one Joe Cassano: the head of AIG Financial Products. The reason why this office of US-based AIG was in London, is so that Cassano could sell CDS as far away from the eye of Federal regulators as possible. Which he did. In fact he sold an unprecedented $2.7 trillion worth of CDS just before the firm collapsed due to one small glitch in the system - the assumption that home prices could go down as well as up. Yet the real question is why he sold so much CDS? The answer is simple - in a world of limited real assets, the only way to generate a practically limitless cash flow annuity would be to sell synthetic insurance on a virtually infinite amount of synthetic underlying. Which he did. Only when it came time to pay the claims, AIG blew up, forcing the government to bail it out, and set off the chain of events where we find ourselves now, where every day could be the developed world's last if not for the ongoing backstops, guarantees and bailouts of the central banking regime.

What is greatly ironic is that in the aftermath of the AIG collapse, the UK was shamed into admitting that it was its own loose, lax and unregulated system that allowed such unsupervised insanity to continue for as long as it did. As the Telegraph reminds us, "Conservative Party Treasury spokesman Philip Hammond called for a public inquiry into the FSA’s oversight of AIG Financial Products in Mayfair. “We must not allow London to become a bolthole for companies looking for a place to conduct questionable activities,” he said. “This sounds like a monumental cock-up by the FSA,” said Lib Dem shadow chancellor Vince Cable. “It is deeply ironic,” he added, that Brown was in Brussels last week calling for tougher global financial regulation just as the scandal over the FSA’s role in one of the key regulatory failures at the root of the global panic emerged as an international issue." It is ironic because the trail in the MF Global collapse, where it is yet another infinitely leveragable product that once again comes to the fore, once again goes straight to that hub for "questionable activities" - London.

But before we explain why London is once again to blame for what was not only the immediate reason of the MF Global collapse, but could well precipitate the next global collapse, a quick look at rehypothecation.

As Reuters points out, it was not so much the act of creating "repos-to-maturity" that imperiled MF Global, but what is a secret gold mine for those privy to it - the process of re-hypothecation of collateral.

Hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.

In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default.

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.
So far so good, assuming there was regulation, and assuming if regulation failed, that the firms that blew up as a result of their greed would truly blow up, instead of being resurrected as TBTF zombies by a government in dire need of rent collection and lobby cash (because with or without regulation, if those who fail are not allowed to fail, then the whole point of capitalism is moot). But... there is always a snag.

Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).

This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.

In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.

So let's see: a Prime Broker taking posted collateral, then using the same collateral as an instrument for hypothecation with a net haircut, then repeating the process again, and again... Ring a bell? If you said "fractional reserve lending" - ding ding ding. In essence what re-hypothecation, and subsequent levels thereof, especially once in the shadow banking realm, allows Prime Brokers is to become de facto banks only completely unregulated and using synthetic assets as collateral. Curiously enough it was earlier today that we also penned "ECB Confirms Shadow Banking System In Europe In Tatters" in which we explained that since ECB has to expand the eligible collateral it will accept, there is no real collateral left, meaning the re-hypothecation process in Europe has experienced terminal failure. Yet the kicker is that the "safety haircut" only occurs in the US. Not in the UK. And therein lies the rub. In the UK, the epic failure of supervision has allowed banks to become de facto monsters of infinite shadow banking fractional reserve leverage - every bank's wet dream! Naturally, Prime Brokers have known all about this which explains the quiet desire to conduct re-hypothecation out of London-based offices for every US-based (and Canadian) bank. Reuters explains:

Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules.

Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation.

Potentially as simple as having MF Global UK Limited, an English subsidiary, enter into a prime brokerage agreement with a customer, a U.S. based prime broker can immediately take advantage of the UK’s unrestricted re-hypothecation rules.
While we already mentioned AIG as an example of the lax UK-based regulatory regime, it is another failed bank that is perhaps the best example of levered failure but in the specific re-hypothecation context: Lehman Brothers itself.

This is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished.

A prime broker need not even require that an investor (eg hedge fund) sign all agreements with a European subsidiary to take advantage of the loophole. In fact, in Lehman’s case many funds signed a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but margin-lending agreements and securities-lending agreements with LBIE in the UK (normally conducted under a Global Master Securities Lending Agreement).

These agreements permitted Lehman to transfer client assets between various affiliates without the fund’s express consent, despite the fact that the main agreement had been under U.S. law. As a result of these peripheral agreements, all or most of its clients’ assets found their way down to LBIE.
And now we get back to the topic at hand: MF Global, why and how it did precisely what Lehman did back then, why it did this in London, and why its failure is a symptom of something far more terrifying than merely investing money in collapsing PIIGS bonds.

MF Global’s Customer Agreement for trading in cash commodities, commodity futures, security futures, options, and forward contracts, securities, foreign futures and options and currencies includes the amowing clause:

“7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”

In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements. With these transactions taking place off-balance sheet it is difficult to pin down the exact entity which was used to re-hypothecate such large sums of money but regulatory filings and letters from MF Global’s administrators contain some clues.

According to a letter from KPMG to MF Global clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited had over 10,000 accounts. MF Global disclosed in March 2011 that it had significant credit risk from its European subsidiary from “counterparties with whom we place both our own funds or securities and those of our clients”.
It gets even worse when one considers that over the years the actual quality of good collateral declined, meaning worse and worse collateral was to be pledged in these potentially infinite recursive loops of shadow banking fractional reserve lending:

Despite the fact that there may only be a quarter of the collateral in the world to back these transactions, successive U.S. governments have softened the requirements for what can back a re-hypothecation transaction.

Beginning with Clinton-era liberalisation, rules were eased that had until 2000 limited the use of re-hypothecated funds to U.S. Treasury, state and municipal obligations. These rules were slowly cut away (from 2000-2005) so that customer money could be used to enter into repurchase agreements (repos), buy foreign bonds, money market funds and other assorted securities.

Hence, when MF Global conceived of its Eurozone repo ruse, client funds were waiting to be plundered for investment in AA rated European sovereign debt, despite the fact that many of its hedge fund clients may have been betting against the performance of those very same bonds.
At this point flashing red lights should be going though the head of anyone who lived through the AIG cataclysm: in effect the rehypothecation scenario affords the same amount of leverage, and potentially even less supervision that the CDS market. Said otherwise, the counteparty risk of daisy chaining defaults is on par with that in the case of AIG.

As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link.
And the kicker:

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.
It turns out the next AIG was among us all along, only because it was hidden deep in the bowels of the unmentionable shadow banking system, out of sight (by definition) meant out of mind. Only it was not: and at last check there was $15 trillion in the shadow banking system in the US alone, where the daisy chaining of counteparty risk meant that any liquidity risk flare up would miccionan the AIG bankruptcy was not even a dress rehearsal for the grand finale.

But where does one look for the next AIG? Who would be stupid enough to disclose the fact that they have essentially the same risk on their off-balance sheet books as AIG had on its normal books? Once again, we turn to Reuters:

The lack of balance sheet recognition of re-hypothecation was noted in Jefferies’ recent 10Q (emphasis added):

“Note 7. Collateralized Transactions
We pledge securities in connection with repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. The pledge of our securities is in connection with our mortgage?backed securities, corporate bond, government and agency securities and equities businesses. Counterparties generally have the right to sell or repledge the collateral.Pledged securities that can be sold or repledged by the counterparty are included within Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition. We receive securities as collateral in connection with resale agreements, securities borrowings and customer margin loans. In many instances, we are permitted by contract or custom to rehypothecate securities received as collateral. These securities maybe used to secure repurchase agreements, enter into security lending or derivative transactions or cover short positions. At August 31, 2011 and November 30, 2010, the approximate fair value of securities received as collateral by us that may be sold or repledged was approximately $25.9 billion and $22.3 billion, respectively. At August 31, 2011 and November 30, 2010, a substantial portion of the securities received by us had been sold or repledged.

We engage in securities for securities transactions in which we are the borrower of securities and provide other securities as collateral rather than cash. As no cash is provided under these types of transactions, we, as borrower, treat these as noncash transactions and do not recognize assets or liabilities on the Consolidated Statements of Financial Condition. The securities pledged as collateral under these transactions are included within the total amount of Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition.

According to Jefferies’ most recent Annual Report it had re-hypothecated $22.3 billion (in fair value) of assets in 2011 including government debt, asset backed securities, derivatives and corporate equity- that’s just $15 billion shy of Jefferies total on balance sheet assets of $37 billion.
Oh Jefferies, Jefferies, Jefferies. Barely did you manage to escape the gauntlet of accusation of untenable gross (if not net) sovereign exposure, that you will soon, potentially as early as tomorrow, have to defend your zany rehypothecation practices. One wonders: will Sean Egan downgrade you for this latest transgression as well? All the better for Leucadia though: one more million shares that Dick Handler can sell to Ian Cumming.

Yet Jefferies is just the beginning. It gets much, much worse.

With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion), Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan ($546.2 billion) and Morgan Stanley ($410 billion).
And people were wondering why looking through the balance sheet of Canadian banks revealed no alert signals. It is because all the exposure was off the books! Hundreds of billions of dollars worth. As for JPM and MS amounting to nearly a trillion in rehypothecation... well, we are confident the market will be delighted to start pricing that particular fat-tail risk as soon as tomorrow.

Yet it is Reuters' conclusion that strikes home, and is identical to what we said last night about the liquidity lock up in Europe and what it means for the shadow banking system, although from the perspective of an inverted cause and effect:

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently.
That's precisely right: the shadow banking system, so aptly named because its death rattle can never be seen out in the open, is slowly dying. As noted yesterday. But lest we be accused of hyperventilating, this time we will leave a respected, non-fringe media to bring out the big adjective guns:

To date, reports have been focused on how Eurozone default concerns were provoking antiestéticar in the markets and causing liquidity to dry up....Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater antiestéticar. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening.
And there you have it: in this world where distraction and diversion often times is the only name of the game, while banks were pretending to have issues with their traditional liabilities, it was really the shadow liabilities where the true terrors were accumulating. Because in what has become a veritable daisy chain of linked shadow exposure, we are now back where we started with the AIG collapse, only this time the regime is decentralized, without the need for a focal, AIG-type center. What this means is that the collapse of the weakest link in the daisy-chain sets off a house of cards that eventually will crash even the biggest entity due to exponentially soaring counterparty risk: an escalation best comparable to an avalanche - where one simple snowflake can result in a deadly tsunami of snow that wipes out everything in its path. Only this time it is not something as innocuous as snow: it is the compounded effect of trillions and trillions of insolvent banks all collapsing at the same time, and wiping out the developed world and the associated 150 years of the welfare state as we know it.

In this light, it makes far more sense why, as we suggested yesterday, the sanest central bank in Europe, the German Bundesbank, is quietly making stealthy preparations to get the hell out of Dodge, as it realizes all too well, that the snowflake has arrived: MF Global's bankruptcy has already set off a chain of events which not even all the world's central banks can halt. Which is ironic for the Buba - what it is doing is "too little too late." But at least it is taking proactive steps. For all the other central banks in the Eurozone, and soon the world, unfortunately the deer in headlights image is the only applicable one. And all because of unbridled greed, bribed and corrupt regulators sleeping at their job, and governments which encourage the TBTF modus operandi as the only fall back one, which in turn gave banks a carte blanche to take essentially unlimited risk.

We are all about to suffer the consequences of all three.
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Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else | ZeroHedge